Indian equity markets are navigating a challenging phase marked by persistent foreign investor outflows, geopolitical tensions in the Middle East, elevated crude oil prices and shifting global capital flows towards AI and semiconductor-driven economies.
Even as India’s weight in the MSCI Emerging Markets Index has slipped and FIIs have pulled out over USD 20 billion from equities in 2026 so far, domestic liquidity and long-term growth optimism continue to provide support to markets.
In an exclusive interview with BW Businessworld, Shibani Kurian, Senior Fund Manager and Head of Equity Research at Kotak Mahindra Asset Management Company, shares her outlook on valuations, FII flows, asset allocation and the broader macro environment.
Edited excerpts:
FIIs have sold USD 20 billion worth of equities in 2026 so far surpassing total selling of USD 18.9.billion in 2025. Do you see this as a cyclical outflow or a structural shift in global allocation away from India?
Global investors are increasingly favouring other emerging markets, partly due to stronger positioning in AI and technology. FII outflows appear to be partly cyclical in nature driven by relative valuations and global earnings differentials. In fact, this is the first time we have seen two consecutive years of FII outflows in India (CY25 and CY26TD) since 2007.
Global investors have likely been reallocating capital toward markets offering near-term earnings momentum or a thematic exposure led by AI growth drivers. Additionally, strong domestic liquidity is increasingly offsetting FII selling, providing support to the markets.
After the recent correction and relative underperformance versus emerging markets, do Indian equities now offer a more attractive valuation?
Post the relative underperformance, Indian markets have seen a contraction of its premium over emerging markets (EM) and the same is now below the long-term average. On an absolute basis too, the Nifty is now trading marginally below its long-term average valuations. Hence, valuations appear far more reasonable even while it’s still not very cheap.
Earnings momentum which was muted in FY25 and FY26 was starting to show signs of improvement before the middle east conflict. Consensus estimates still factor in mid-teens earnings growth for nifty for FY27E and FY28E.
The pace of improvement of earnings will of course depend on how long the conflict persists. We expect the growth trajectory for domestic-oriented businesses to be more resilient than those with global linkages.
Given the global uncertainty, elevated oil prices and domestic valuation concerns, how should retail investors position themselves over the next 6-12 months?
Over the next 6 to 12 months, the key for retail investors is to continue to focus on their asset allocation and process adherence based on risk appetite and investment goals. Systematic investments plans (SIPs) and systematic transfer plans (STPs) remain the best way to invest in equity markets.
We would advise investors to use market corrections as accumulation opportunities. For an aggressive investor, our recommendation would be ‘overweight’ on equities. In terms of asset allocation within equities our preference remains more towards large and midcaps.
Indian Markets have slipped to fourth position in the MSCI EM index, what's your view on this?
India’s fall in rank reflects the underperformance of India against EM in USD terms and strong outperformance of peers like Taiwan and Korea. However, India still remains a large and increasing structural component of the EM index. Combined with strong domestic liquidity acting as a stabiliser, the shift in ranking should be viewed more as a near-term rotation effect than a structural negative for India’s long-term positioning in global portfolios.
Despite near-term geopolitical volatility, do current valuations make a stronger case for medium-term allocation to Indian equities?
We are structurally positive on equities in the medium-term even while in the near-term we would have to navigate volatility. A lot depends on the time period over which the current mid east conflict ends. However, past data around wars shows that markets typically bottom out before the end of the war. Further, post a crisis, the market up move and recovery has been led by valuation expansion and then earnings have to follow.
In this context, valuation multiples have corrected across the board from the September 2024 highs even while there has been some recovery off late. Now on a one year forward PE basis Nifty is trading slightly below its 10-year average and hence at the margin risk reward is turning favourable though we are not in a deep value zone yet.
How do you see the outlook for interest rates, the rupee and gold amid elevated crude prices and ongoing geopolitical uncertainty?
We expect RBI to remain on a wait and watch approach keeping policy rates on hold. The central bank is likely to remain data dependent with inflation being one of the key variables.
The rupee has sharply depreciated against the USD due to elevated oil prices and its impact on the current account deficit (CAD) and balance of payments amongst others. In that context we expect that the CAD to average 1.5 per cent of GDP over the next five years. Hence the bias of the currency would be towards depreciation. RBI, however, has 11 months of imports as forex cover to counter sharp volatility in the currency markets.
After a sharp rally, gold prices have corrected from their peak. However, gold demand continues to hold up as per the latest data. This coupled with the fact that the supply is constrained, our view on Gold remains constructive over the long term. |
